Institutional investors might be able to stay ahead of the curve by adopting ‘circular economy’ principles, according to a new report from the Investor Group on Climate Change (IGCC).
In the recently published ‘Regenerate & restore’ paper, the IGCC says the circular economy model – a business approach focused on minimising waste, recycling and nurturing “natural and social systems” – could encompass a wide range of other non-financial factors, such as climate change.
“A circular economy may present a considerable opportunity for institutional investors in financial returns, climate solutions and emissions reductions, and other parts of their environmental, social and governance (ESG) considerations,” the report says. “…Investors have an important potential role in driving progress towards a more circular economy, which would help reduce emissions and climate risk, restore resilience and protect the long-term financial interests of beneficiaries.”
The study says early data suggests the circular economy may also offer access to a large untapped source of future returns for investors targeting innovative companies.
“In 2021, PWC valued the circular economy’s potential in Australia at A$2 trillion over the next 20 years. A circular economy could abate 165 million tonnes of carbon pollution each year in Australia. In Europe, circular initiatives throughout the construction, food and transport sectors are predicted to yield annual benefits of up to €1.8 trillion (US$2.1 trillion) by 2030,” the report says.
“Less than 9 per cent of the resources in the global economy are managed along circular principles, which suggests approximately 90 per cent of resources may be under-utilised.”
At least initially, most of the circular economy opportunities would probably pop up in unlisted markets, the IGCC paper says.
“Private markets are more likely to provide exposure to new companies with new circular economy solutions. Across the spectrum of private investing, from early-stage funding to deal sourcing to public offering, governmental legislation pushes investors to factor ESG metrics into investment analysis. At the same time, clients pull investors forward to take their preferences into account. Relative to the public markets, private markets allow investors to require these outcomes and let them track the impact their money is creating,” the study says.
“Recently, there has been steep growth in funds to invest in circular economy activities via the private markets, including venture capital, private equity and private debt. In public markets, opportunities to get circular economy exposure increased sixfold during an 18-month period, from US$0.3 billion in January 2020 to over US$2 billion in June 2021, with broadly positive financial performance results (ongoing performance is, of course, not assured).”
But rather than scrapping current ESG strategies, the paper says investors can “embed” circular economy principles in existing models.
The IGCC also recommends investors looking to introduce circular economy into their processes should follow the ‘four Ps’ approach used for climate-alignment, namely: plan; pledge; progress; and, publish.
Furthermore, the report says organisations can start the circular journey through a four-stage process, including:
- governance – to build an understanding of circular economics across internal teams and key decision-makers;
- integration – adding new circular economy analysis within company and portfolio risk and emissions assessments;
- allocation – monitor existing exposures to companies delivering circular economy solutions and consider new mandates targeting emerging circular economy solutions, especially in private markets; and,
- engagement – intergrating circular economy questions in existing engagement activities, particularly where companies have exposure to diversified mining, steel, cement, food and beverage, aviation and construction. And engage with policymakers and regulators.
Ashleigh Morris, head of Coreo – a circular economy strategic advisory firm – and Mercer sustainable investment partner, Jillian Reid, authored the report along with IGCC’s Madeleine Hill.
The IGCC is a coalition of institutional investors in Australia and NZ representing some A$3.6 trillion in the region.
Primarily, the organisation aims to spark “investor action on climate change to avoid dangerous global warming, responsibly manage long term risks and drive sustainable returns for investors and the beneficiaries they represent”, the website says.